In new analysis prepared for ONS 2014, Wood Mackenzie says the role of incremental projects in Norway is growing in importance, which account for almost half of Norway’s US$200 billion (NKr 1,250 billion) upstream development spend over the next decade.
The upstream industry is in a period of intense investor pressure, meaning greater scrutiny of capital allocation and project screening. This means that decisions over whether to invest in greenfield developments or incremental projects are crucial.
Wood Mackenzie finds that on a cost per barrel and risk basis, incremental projects stack up favorably with new projects.
“As the Norwegian Continental Shelf is maturing and the government wants to increase overall recovery rates from 50-60%, brownfield and incremental projects are becoming more important,” says Lennert Koch, Wood Mackenzie senior northwest Europe upstream research analyst. “We estimate that incremental projects - such as compression installations, infill drilling programs and field redevelopments - account for almost half of the estimated $200 billion of upstream development spend over the next 10 years.”
Increased recovery rate targets combined with capital cost discipline across the global upstream sector mean that companies are increasingly scrutinizing project economics. Wood Mackenzie has compared the economics of Norwegian greenfield developments against those of five large incremental projects: Åsgard subsea compression, Heidrun Nord Flank, Hod redevelopment, Ormen Lange subsea compression and Valhall Vest Flank. Combined, these projects carry a total investment of $11 billion (NKr 69 billion) and will add estimated reserves of 1 billion boe, increasing the recovery factor of the initial fields by an average of 9%, greatly contributing to the overall increase in recovery rates for Norwegian fields.
The analysis reveals that while some of the projects Wood Mackenzie profiled are challenging, their economics are in line with Norway’s greenfield projects. In fact, the average investment capex per barrel of these projects is 30% lower and average rate of return is 18%, which means a reduced economic risk to the companies involved, in addition to the lower perceived subsurface risk.
“Several of the incremental projects have already seen large increases in estimated costs, eroding their value which importantly shows that they are just as much at risk of being cancelled as low value greenfields,” added Koch.
As these developments are essential to the government’s goal to optimize recovery rates, Wood Mackenzie says it was a surprise when the 2013 tax change hit these projects hard.
“Although Åsgard subsea compression was exempt from the tax change, the average post-tax value of the other projects we compared was lowered by an average of 14%. No plans are in place to change the tax regime, or incentivize incremental developments,” says Koch. “Their lower cost per barrel and their time-critical nature may push the government to stimulate such projects with improved fiscal terms.”
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